§ Mr. John Boyd-Carpenter (Kingston-upon-Thames)
I beg to move Amendment No. 22, in page 16, line 39, to leave out '£2,000' and to insert '£5,000'.
§ The Deputy Chairman (Mr. Sydney Irving)
With this Amendment the Committee may discuss the following Amendments: No. 23 in line 40, leave out from 'excess' to end of Clause and add:On the first £2,000 of the income chargeable to surtax—Nil.On the next £500 of the income chargeable to surtax up to £2,500 at 2s. 0d. in the £.On the next £500 of the income chargeable to surtax up to £3,000 at 2s. 6d. in the £.On the next £1,000 of the income chargeable to surtax up to £4,000 at 3s. 6d. in the £.On the next £1,000 of the income chargeable to surtax up? to £5,000 at 4s. 6d. in the £.On the next £2,500 of the income chargeable to surtax up to £7,500 at 5s. 0d. in the £.On the next £2,500 of the income chargeable to surtax up to £10,000 at 5s. 6d. in the £.On the next £2,500 of the income chargeable to surtax up to £12,500 at 6s. 0d. in the £.On the next £2,500 of the income chargeable to surtax up to £15,000 at 6s. 9d. in the £.On the remainder of the income at 7s. 6d. in the £.No. 24, in line 40, leave out from ' at' to end of Clause and add:
'nine-tenths of the higher rates in respect of the excess as were charge for the year 1964–65.
§ No. 25, in page 17, leave out lines 1 to 3.
§ Mr. Boyd-Carpenter
This Amendment and those in the names of my hon. and right hon. Friends which follow are intended to raise one aspect of the question of the level of direct personal taxation which we discussed more broadly on the previous body of Amendments. These Amendments relate to Surtax. I hope we may be able to have a discussion of the effects of high rates of Surtax beginning at a very low income level in their general effects on the economy. All these Amendments raise in somewhat different forms and shapes the question as to whether the present level of Surtax and the present point of entry to it is a sensible level from the broad national point of view.
The Amendment in my name seeks to raise the point of entry in respect of both earned and unearned income from the present level of £2,000 to £5,000 a year. I think it is on the face of it a moderate proposal when one recognises that the £2,000 level was fixed as long ago as the early 1920s. The Chief Secretary is in a better position than I am, but I think any hon. Member will be able to calculate that to have the same purchasing power as £2,000 a year had in the early 1920s we would have to move to a substantially higher figure than the one I have envisaged in my Amendment.
One of the difficulties about Surtax has been that every year the combined effect of the fall in the value of money 921 and the related rise in money incomes has been to cause Surtax to bite lower down the income scale and more sharply. No one, with the single and very honourable exception of my right hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd), has touched it over the years. My right hon. and learned Friend in respect of earned income provided that tax should not be payable below the level of £5,000. Even my right hon. and learned Friend's moderate provision provided that, in respect of earned incomes above that level, the amount of Surtax paid should be based upon the assumption that Surtax had been payable below the £5,000 mark. The effect of my Amendment would be to move the entry point for earned and unearned income alike to £5,000.
I will just comment, if only for the purpose of anticipating comment, on the criticism which will no doubt be made of the advantage given in respect of unearned income. I have always thought that the expression "unearned income" is a singularly inapposite one. I will give the Committee one example. If someone works for an employer who has a pension scheme and if he gets a pension at the end of the day, that pension is classified, rightly, as earned income. If a similar person builds up a small business—let us say he runs a shop—and if on reaching the age at which he can no longer run it he sells it and lives on the income resulting from the sale, that income, though it is, in truth, the result of a life's work, is taxed as unearned income. I have often thought that the expression "unearned income" is not only perhaps somewhat pejorative but is also a singularly inaccurate description of what, not in all cases, but in a great many cases, is income which has been earned—the income fiom savings accumulated, perhaps, over a working life.
I therefore make no apology for proposing that, in respect of both these types of income, earned and unearned alike, we should move, not back to the point in terms of purchasing power fixed in the 1920s, but some way at any rate back towards that.
My right hon. and hon. Friends will no doubt speak to their Amendments. When we have heard the debate, we shall be able to decide whether to vote on any or each of them. I want at this stage to 922 try to have some discussion on the effect of the prevailing rates of Surtax on the whole life and texture of our economy.
On the previous Amendment, the Chancellor of the Exchequer made great play with the fact that, if he lost the revenue of which that Amendment would have deprived him, other sources would have to be found or economies made. I have never regarded it as the duty of an Opposition in proposing a reduction in taxation necessarily to advise the Government how to make up the loss. However, in this case I would say that, if the Chief Secretary is seriously worried about the financial consequences of this proposal to the balance of his Budget, there are two answers available to him.
One answer is to pay out less by way of premium on S.E.T. The premium on S.E.T. is designed as a stimulus, no doubt, for industry. I think that it is a singularly ill-designed one; but you, Mr. Irving, would rule me out of order if I went further on that aspect. I would only argue that the stimulus which this batch of Amendments offers is, in my view, a very much more effective one than that offered by the money laid out in S.E.T. premium.
The second and, if the Committee wishes, alternative method of making up the gap is almost too obvious to need arguing. If a substantial relief is given on Surtax, there will undoubtedly be a substantial increase in savings. We have heard from the Chancellor—I think that he said it last year—that savings were, from a budgetary point of view, the equivalent of taxation.
I come to the effects of the tax. I think that the Committee will agree that modern economic thinking is moving more and more away from the straight Keynsian doctrine that it was the totality of taxation that mattered in its impact on the economy to the more sophisticated approach that it is not merely the amount of taxation but the way in which the money is raised that has significant economic effects.
Any given sum of money can be raised by way of taxation by different taxes with profoundly different economic effects.
It is the purpose of my argument to show that the money raised by Surtax, at least at the present level, is raised in 923 about the most damaging way for the whole life, vitality and enterprise of the economy. Part of our trouble—I hope that you will not rule me out of order if I say this, Mr. Irving—has been that our taxes have not been devised with this concept anything like sufficiently in mind. I think that this results from our having no taxation division in the Treasury. Our taxation is devised basically on the advice of the Inland Revenue and the Customs, honourable Departments concerned to raise honourably and efficiently large sums of money, but not Depart-mentally interested in the economic repercussions of raising the necessary revenue in any particular way. This is, I suggest, a weakness in the Treasury machine, and I think that the point is highly pertinent, though I pass quickly from it now in order not to incur your displeasure, Mr. Irving.
I am helped on this part of the argument by the fact that Surtax is not a great revenue raiser. In 1966–67, the total estimated yield was £248 million. The actual out-turn was £242 million, about 7 per cent, of the yield of Income Tax and less than a quarter of the yield of the tobacco duty—important, of course, but secondary.
The case for Surtax is more often argued in the House on social rather than on fiscal grounds. The Chancellor of the Exchequer has been something of an offender in this respect, being apt to say, when arguing about Surtax, that it is paid by those who can well afford it. There is a social argument on these lines—it would be silly to deny it—but it is a social argument which can be dangerously overworked. There was a powerful though short letter in The Times a few months ago saying substantially this: if we tax heavily the high earners and give the proceeds to the low earners, two things happen; the high earners go and the low earners come. That is a powerful summary of the dangers if we carry this kind of tax too far.
Before I come to my main argument, there is an independent point here which is worthy of consideration. I refer to the effect of Surtax and aggregation for Surtax purposes of the incomes of married people, particularly of highly educated and able married women. There quickly 924 comes a point, when a woman is married to a man also with substantial earnings, at which her additional earnings are almost a nuisance because, being aggregated, they push the married couple into very high tax brackets and they are both inclined to think it is not worth the trouble.
There is a loss to the community here, particularly in the case of highly educated women who have brought up their children and who could return, probably to a high level of responsibility, if there were some financial inducement to do so. What is so paradoxical about this rule is that if the married couple are divorced and live in what is even nowadays still described as sin their incomes are not aggregated. Incomes are not aggregate if brothers and sisters or parents and children live together, but they are in respect of married couples. This is a small but distinct point. It affects only a few, but it affects a useful and significant body of people, and it is one of the consequences of high overriding levels of Surtax.
I come now to the effect on the economy as a whole, the effect which operates through many of the ablest members of our society by the discouragement of the taking on of extra responsibilities or the making of extra efforts. Our practice in this country in this respect is very different from that of our main competitors. On the previous Amendment, the Chancellor of the Exchequer gave us an interesting though somewhat slanted disquisition on the comparison between the general level of taxation in other countries and in this. As my hon. Friend the Member for Finchley (Mrs. Thatcher) so well-pointed out, his figures were grossly over-weighted by his use of insurance contributions on the side of the equation which represents the level of the continental countries.
Apart from the point she made, these insurance contributions are, broadly speaking, regressive and therefore, although in many of these countries the total level of direct taxation on incomes may approach our own, that results from the fact that they concentrate a large part of their taxation on incomes at the lower levels where there are a lot of people and where a lot of money is raised. But there is not the effect that we get here of the highly concentrated taxation on the higher levels of income.
925 In order to furnish myself with figures, I asked the Chancellor a Question on 7th March, and his Answer appears at cc. 1252 and 1253 of the OFFICIAL REPORT, for that date. I asked him how much of his income—earned income only—a married man with two children retained as a proportion of the total above certain levels. The Answers I was given make my point, that in this respect we are far and away different to, and worse than, our rivals.
The Committee will have in mind the relevant figures of the percentage of income retained—the marginal rate, if one likes—above certain levels by such a man. Up to about the £8,500-a-year level, although we are worse than everybody except Japan, the distinction is not all that great. But once one comes to the £10,000-a-year level the figures are very striking. The Englishman at that level retains 26.25 per cent. of his earnings; the American 41.6 per cent.; the Frenchman 60.4 per cent.; the West German 52.9 per cent.; and even the Japanese retains 36 per cent.
§ Mr. Diamond
Will the right hon. Gentleman clarify what he is saying? Is he talking about the marginal rate, that is, what is retained on the next £ above £10,000?
§ Mr. Boyd-Carpenter
Yes. I had used the expression "marginal rates". This is the amount of income retained above certain levels as a proportion of the total above those levels.
When one gets to £15,000 the figures are very striking. The Englishman retains 16.25 per cent.; the American more than twice that—37.6 per cen.; the Frenchman more than three times—53.2 per cent.; the German just about three times—49.8 per cent.; and the Japanese very nearly double, at 30 per cent. All these countries are not fools. It is for the Government, who insist on maintaining this quite different level in this country, to justify it. The onus is on them to show that everybody is out of step except our Jack. The practice of foreign countries is very relevant.
I should add this further qualification. The right hon. Gentleman noted that in giving this Answer he had done two or three very strange things, which I imagine make the real position even 926 worse than he told us. For example, he said that for this purpose he ignored our own 10 per cent. surcharge on Surtax but had taken into account the 6 per cent. American Vietnam surcharge, and he had treated the rate of exchange as five dollars to the £ for this purpose. None of those factors, even though they may operate to obscure the position, prevent it from being very clear that at these higher levels we charge very much more tax and leave the taxpayer with much less of his income than any other country by enormous margins.
It is no use the Government saying, if they want to, that this does not matter because people at these incomes do not matter. That would be sheer hypocrisy. The party opposite includes a number of very rich men, and, more than that, the Minister of Power has, absolutely rightly, offered salaries far in excess of those I have quoted, running into £20,000 a year, in order to get the right men to run his new National Steel Corporation. Therefore, the Government must accept that incomes of this sort are not only justifiable in a modern society but that those who earn them play a useful part in the effective working of that society.
One of the effects of our discriminatory treatment is undoubtedly the brain drain. On Second Reading, I recalled to the House the extraordinarily striking comment on the way the brain drain works by Professor Titmuss in his address to the National Conference on Social Welfare. I want to quote what he said, and I remind the Committee that, whatever else he may be known for, the Professor is not known for his enthusiasm for Tory policy. The report of his address said:After all, what could social workers be expected to do about 100,000 doctors, scientists and engineers which, Professor Titmuss told us, the United States had absorbed, and to some extent deliberately recruited, since 1949?The Americans would, he said, have saved some $4,000 million (£1,400 m.)"—he used the more conventional rate of exchange—by not having to educate or train, or train fully, this vast quantity of human capital. They had spent more on consumption goods, less on public services. They had taxed themselves more lightly while imposing heavier taxation on poorer countries.Precisely. It is just because the Americans offer to ability the opportunity to retain 927 a larger proportion of what ability can earn, particularly in the higher brackets, that this immense volume of ability has proceeded to the United States, with the curious result, as Professor Titmuss was right to emphasise, of a great saving to the United States in the training of these people and a great loss to the countries which trained them and then, having trained them, sought to tax them exorbitantly.
I recall to the Chancellor the solemn warning given as long ago as 21st October last by the Governor of the Bank of England when, as reported in The Times, he pointed out that our burdens of taxation were excessive and were having a harmful effect on the economy.
That being so, what good are we doing in this country by maintaining these very high rates of taxation? We are not raising any vast sums of revenue. As I have mentioned, the whole yield of surtax, though important, is not one of the major factors. But surely it is common experience that it is increasingly difficult adequately to reward up and coming young executives and technicians, virtually impossible to make financial provision which would make it worth while for them to move, for example, from the North to London or from London to the North. It is increasingly difficult, as my right hon. Friend said earlier, to get a properly ranged hierarchy of salaries in any great organisation if net income is what is considered. I do not think it is chance that, under this burden of taxation, there is a listlessness and apathy and lack of zip in the economy—and all to raise not very large sums of money.
What is to happen, too, if we go into Europe? My right hon. Friend has already referred to this in relation to Income Tax, but the point is even sharper here. As the Committee knows, it is an obligation under the Treaty of Rome to achieve some measure of equality in national taxation. It is also a necessary condition of common sense, because once under the Treaty there is free movement of persons and capital it will be impossible to maintain widely differing rates of taxation of this kind on individuals in one country of the Community as compared with the others. 928 People will be free to take their capital and their business with them with disastrous consequences to the country which they leave.
I asked the Chancellor the other day whether he was making preparations to adjust our tax system on the basis of our entering Europe. He told me that preparations were being made.
§ It being Ten o'clock, The CHAIRMAN left the Chair to report Progress and ask leave to sit again.
§ Committee report Progress.